I began analyzing the financial markets in 1982 when I became the research director for a financial advisory firm and provided regular market analysis on stocks, commodities, currencies and mutual funds. I am a technical analyst. Much of my focus was on how obscure technical indicators or methods, could be applied to the financial markets and used as an effective trading tool. Many of the indicators I have used for years, such as Gerry Appell's MACD and Welles Wilder's RSI, have subsequently gained wide popularity.

This page is devoted to sharing my insights and techniques in order to help you become a smarter trader/investor. Over the past twenty years I have traveled around the world several times, visiting all of the major financial centers as he taught professional traders and money managers my approach to the financial markets.

My method of stock selection starts with a proprietary scanning method to select a group of individual stocks for more extensive analysis. This includes an in-depth study of the volume patterns that I use to determine the strength of a stock's trend. Those with the strongest trend, either up or down, are then further analyzed to determine entry, exit and risk levels. I use Fibonacci retracement, projection and extension analysis to determine both profit objectives as well as stops.

Mastering the Basics of Stop Placement

I have always advocated placing a stop order at the same time as your buy or sell order. It allows one to roughly quantify the risk of any investment or trade. By analyzing the risk it often becomes clear that the risk is too high. One of the most common mistakes is to raise the stop instead of lowering the entry level. If you are going to adjust the parameters in order to lower the risk focus on changing the entry not the stop.

In addition to the process of determining the initial stop, it is important to also manage the trade once a position is established. This is an art more than a science as every price pattern has subtle differences. Though I follow a systematic approach, the rules are not cut and dried. Clearly when to sell is an important decision in terms of managing one’s portfolio and can be the key factor in determining whether you are profitable or not.

Those who follow my daily column have been able to follow both the placement of the initial stop as well as how the stops are managed once a position is established. Because of time and space constraints the specific details of the stop choices are generally not provided. The goal of this lesson is to provide those details, and in the process provide more insight so that you can improve your bottom line.

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In this first chart I would like to look at a historical example so I can share some of the basic guidelines that I try to follow. This will be followed by actual examples of trades and stops I have recommended in the past year.

This chart of the Spyder Trust (SPY) covers the period from March 2003 through early August of 2003. On March 12, the SPY made a low of $79.38 but then closed near the day’s highs. The volume was strong that day and increased over the next few days as the on-balance-volume broke through resistance. Seven days later on March 21, there was clear evidence that SPY had bottomed as it had moved well above the highs of the past six weeks on strong volume.

My favored strategy is to buy on a setback after an uptrend has been established. So on March 21, a typical recommendation would have been to go 50% long at $86.06. This was just above the 38.2% Fibonacci retracement support at $85.84 and above the round number of $86.00. The second 50% buy level was at $85.28, which was midway between the 38.2% support and the 50% support at $84.60.

The initial stop would have been at $82.88, which was below the 61.8% support at $83.37 as well as the $83 level. The approximate risk would have been 3.2%. It was also below the low of March 17 ($83.22). which the candle shows was a strong up day. Both orders would have been filled between March 27 and March 31 when the low was $84.40.

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The Spyder Trust (SPY) made a new rally high on April 7 and when this high was exceeded on April 22 (point 3) the stop would have been raised to $85.82. This was below the previous swing low. On May 5 when SPY closed at $93.03 the stop could have been raised to $87.86, which was just under the mid-April low.

As I have discussed in the past I favor closing out part of any position when I can get a decent profit in a relatively short period of time. This, of course, reduces the risk to your portfolio and also has psychological benefits. To determine the profit taking levels I use a combination of Fibonacci and chart analysis.

In this instance the 127.2% retracement target was at $91.42 but the chart suggested that SPY could move back to the December 2002 high of $96.05. The 100% or equality target could be calculated using the net change of the initial rally from the March lows ($10.50) and adding it to the late March low of $84.40

This gives you a 100% target of $94.90, which is noted by a red line on the chart. It was hit first on May 12 and would have been a reasonable level to sell half of the position. SPY did move sideways for several days at this level before correcting.

By May 28, SPY had moved to new rally highs (point 5) and the stop would have been raised to $91.29 (red line), which was below the prior swing low as well as the May 2 low.

The 161.8% target at $101.39 was hit on June 6 as the high was $101.40. After a one-day pullback SPY again closed at new rally highs on June 12 (point 6) and the stop could have been raised further to $97.33 (red line). As it turned out SPY peaked three days later and the stop was hit on July 1 (point 7).

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